<PAGE>

                       ENVIRONMENTAL TECTONICS CORPORATION



                                      2001

                           ANNUAL SHAREHOLDERS' REPORT



<PAGE>


FINANCIAL REVIEW
($ in thousands, except share and per share data)
<TABLE>
<CAPTION>




Fiscal Year End                                     2001            2000           1999          1998         1997
                                                    ----            ----           ----          ----         ----
<S>                                                <C>             <C>          <C>           <C>           <C>
Net sales                                          $ 32,452        $ 34,920     $ 29,225      $ 29,284      $ 21,884
Gross profit                                         13,075          12,798       11,672         9,298         5,742
Operating income                                      4,122           5,327        4,759         4,208         1,196
Net income (loss)                                     2,021           2,837        2,170         1,794           (20)
Earnings (loss) per common share:
    Basic                                               .29             .40          .32           .25          (.01)
    Diluted                                             .27             .36          .29           .23          (.01)
Working capital                                      25,070          16,306       13,755        11,462        10,334
Long-term obligations                                12,778           4,455        4,219         4,356         6,997
Total assets                                         40,705          31,897       35,448        22,955        23,095
Total stockholders' equity                           18,796          16,245       11,030         8,579         6,409
Weighted average common shares:
    Basic                                         7,087,000       6,604,000    5,861,000     5,981,000     5,930,000
    Diluted                                       7,499,000       7,319,000    6,312,000     6,496,000     5,930,000

</TABLE>

All earnings per share and share amounts have been restated to reflect a 2 for 1
stock split effective May 28, 1999. No cash dividends have ever been paid on the
Company's common stock, and the Company is currently prohibited from declaring
any cash dividends on common stock under the terms of its credit facility.


                                       1






<PAGE>


Management's Discussion and Analysis of
Financial Condition and Results of Operations


Results of Operations

                           FORWARD-LOOKING STATEMENTS

         Except for historical information, this report may be deemed to contain
"forward-looking" statements. The Company desires to avail itself of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is including this cautionary statement for the express purpose of
availing itself of the protection afforded by the Act.

         These forward-looking statements includes statements with respect to
the Company's vision, mission, strategies, goals, beliefs, plans, objectives,
expectations, anticipations, estimates, intentions, financial condition, results
of operations, future performance and business of the Company, including but not
limited to, (i) projections of revenues, costs of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects, dividends,
the effect of currency fluctuations, capital structure and other financial
items, (ii) statements of plans and objectives of the Company or its management
or board of directors, including the introduction of new products, or estimates
or predictions of actions by customers, suppliers, competitors or regulating
authorities, (iii) statements of future economic performance, (iv) statements of
assumptions and other statements about the Company or its business, and (v)
statements preceded by, followed by or that include the words, "may," "could,"
"should," "pro forma," "looking forward," "would," "believe," "expect,"
"anticipate," "estimate," "intend," "plan," or similar expressions. These
forward-looking statements involve risks and uncertainties, which are subject to
change based on various important factors (some of which, in whole or in part,
are beyond the Company's control). The following factors, among others, could
cause the Company's financial performance to differ materially from the goals,
plans, objectives, intentions and expectations expressed in such forward-looking
statements: (1) the strength of the United States and global economies in
general and the strength of the regional and local economies in which the
Company conducts operations; (2) the effects of, and changes in U.S. and foreign
governmental trade, monetary and fiscal policies and laws; (3) the impact of
domestic or foreign military or political conflicts and turmoil; (4) the timely
development of competitive new products and services by the Company and the
acceptance of such products and services by customers; (5) willingness of
customers to substitute competitors' products and services and vice versa; (6)
the impact on operations of changes in U.S. and governmental laws and public
policy, including environmental regulations; (7) the level of export sales
impacted by export controls, changes in legal and regulatory requirements;
policy changes affecting the markets, changes in tax laws and tariffs, exchange
rate fluctuations, political and economic instability, and accounts receivable
collection; (8) technological changes; (9) regulatory or judicial proceedings;
(10) the impact of any current or future litigation involving the Company; and
(11) the success of the Company at managing the risks involved in the foregoing.

         The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.

         The company had a net income of $2,021,000 or $.27 per share (diluted),
versus a net income of $2,837,000 or $.36 per share (diluted) in 2000. Operating
income was $4,122,000, a decrease of $1,205,000 or 22.6% over 2000. This
decrease was primarily the result of higher general and administrative expenses
partially offset by an increased gross margin as the rate as a percentage of
sales was up by 3.7 percentage points. The improvement in the gross margin rate
as a percentage of sales reflected both an improvement in Entertainment line
performance and an overall increase in Aircrew Training Systems gross margin on
higher domestic and international claims revenue and corresponding gross margin.
Claims bookings for the year increased operating income by $1,325,000, net of
associated manufacturing costs and legal expenses. Included in the above was a
claim against an international customer which was settled in the three months
ended February 23, 2001.

         Total sales decreased $2,468,000 or 7.1% from 2000 as sales performance
was mixed, with the most significant decreases being evidenced in the Company's
Polish Subsidiary and Simulation and Hyperbaric product areas. A partial offset
was seen in the Environmental, Sterilizer and Entertainment lines (Entertainment
was up $4,719,000 or 128.2%) and sales from the Company's UK Subsidiary, which
was purchased in March 2000. Geographically, international sales, including
those from the Company's foreign subsidiaries, were down $7,363,000 or 31.0% and
represented 50.6% of total sales, down from 68.5% from the prior year. U.S.
Government sales were down $671,000 or 42.3%, and represented 2.8% of total
sales, down from 4.5% from the prior period. Providing a partial offset was an
increase in domestic sales, which were up $5,566,000 or 58.2%, primarily from
the aforementioned increase in the Entertainment line. Domestic sales
represented 46.6% of the Company's total sales, up from 27.0% in the prior
period. Customers in 2001 representing 10% or more of sales were the United
Kingdom Ministry of Defense, $5,524,000, and the Walt Disney companies,
$8,400,000. Additionally, open orders for the Walt Disney companies constituted
56.5% of the Company's backlog at February 23, 2001.

         The Company considers its business activities to be divided into two
segments: Aircrew Training Systems (ATS) and Industrial Simulation. On a segment
basis, sales of the Company's Aircrew Training Systems (ATS) products, which
create and monitor the physiological effects of motion (including spatial
disorientation and centrifugal forces) on humans and equipment for medical,
training, research and entertainment markets, were $23,567,000, a decrease of
$2,794,000, or 10.6% over 2000. Sales of these products accounted for 72.6% of
the Company's sales compared to 75.5% in 2000. Sales in the Company's other
segment, the Industrial Group, which designs and produces chambers that create
environments that are used for sterilization, research and medical applications,
increased $326,000 to $8,885,000, an increase of 3.8%, and constituted 27.4% of
the Company's total sales compared to 24.5% in 2000.

                                       2
<PAGE>


         Gross profit increased $277,000 or 2.2%. As a percentage of sales,
gross profit was 40.3%, up from 36.6% in 2000. This increase was attributable to
an improvement in the rate as a percentage of sales and higher domestic and
international claims revenue and resulting gross margin.

         Operating profit decreased $1,205,000, or 22.6% compared to 2000. On a
segment basis, ATS had an operating profit of $5,794,000, an increase of
$755,000 from the prior period, while the Industrial Group had an operating loss
of $906,000 compared to an operating profit of $1,355,000 in 2000. These segment
operating profits were offset, in part, by unallocated corporate expenses of
$766,000, a decrease of $170,000 over 2000.

         Selling and administrative expenses increased $1,499,000, or 22.9%, due
principally to higher legal expenses to support the Company's domestic and
international claims, higher staffing and related expenses in support of the
Company's aggressive new initiatives, a corporate-wide ramp-up of worldwide
marketing efforts, and additional selling and administrative expenses for the
Company's UK subsidiary, which was purchased in March 2000. As a percentage of
sales, selling and administrative expenses were 24.8% compared to 18.8% in 2000.

         Research and development expenses decreased slightly ($17,000, 1.8%)
from 2000, primarily for ATS and entertainment product applications. Most of the
Company's research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific
contracts, as well as research for feasibility and technology updates.
Capitalized software development costs for 2001 were $550,000 compared to
$555,000 in 2000. Amortization of software costs, which was charged to cost of
sales, was $455,000 and $596,000 for 2001 and 2000, respectively.

         Interest expense (net of interest income) increased $87,000 or 11.8%
from 2000 reflecting higher borrowings at a higher average rate. Letter of
credit and other expenses decreased $10,000 or 9.2% principally due to decreased
bank charges.

         The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.

Fiscal 2000 Versus Fiscal 1999

         The company had a net income of $2,837,000 or $.36 per share (diluted),
versus a net income of $2,170,000 or $.29 per share (diluted) in 1999. Operating
income was $5,327,000, an increase of $568,000 or 11.9% over 1999. These
increases were primarily the result of a higher gross margin reflecting the
increased sales level.

         Total sales increased $5,695,000 or 19.5% from 1999 as sales increases
were evidenced in all areas, most significantly in the domestic market, which
was up $4,209,000, or 80.7%. Domestic sales represented 27.0% of the Company's
total sales, up from 17.9% in the prior period. Increases were evidenced across
all product areas except hyperbaric, with the most significant increases in
entertainment products and the Company's disaster management simulator product.
Sales to the U.S. Government increased $430,000, 37.1%, and represented 4.5% of
total sales, up slightly from 4.0% in the prior period. The increase reflected
sales to the U.S. Navy for large submarine decompression chambers. International
sales, including sales of the Company's Polish subsidiary, increased $1,056,000,
and represented 68.5% of the Company's total sales, down from 78.1% in the prior
period. The increase reflected additional sales in the Company's Polish
subsidiary, which benefited from an additional 4 months activity in the current
period. Customers in 2000 representing 10% or more of sales were Mends
International $8,107,000, the United Kingdom Ministry of Defense $4,821,000, and
the Walt Disney companies $3,681,000. Additionally, open orders for the Walt
Disney companies constituted 56.7% of the Company's backlog at February 25,
2000.

         On a segment basis, sales of the Company's Aircrew Training Systems
(ATS) products, which create and monitor the physiological effects of motion
(including spatial disorientation and centrifugal forces) on humans and
equipment for medical, training, research and entertainment markets, were
$26,361,000 an increase of $1,896,000, or 7.7% over 1999. Sales of these
products accounted for 75.5% of the Company's sales compared to 83.7% in 1999.
Sales in the Company's other segment, the Industrial Group, which designs and
produces chambers that create environments that are used for sterilization,
research and medical applications, increased $3,799,000 or 79.8% and accounted
for 24.5% of the Company's total sales compared to 16.3% in 1999.

                                       3
<PAGE>


         Gross profit increased $1,126,000 or 9.6%. As a percentage of sales,
gross profit was 36.6%, down from 39.9% in 1999. This decrease was attributable
to a product mix shift to lower margin Industrial Group products.

         Operating profit increased $568,000, or 11.9% compared to 1999. On a
segment basis, ATS had an operating profit of $5,039,000, a decrease of $658,000
from the prior period, while the Industrial Group had an operating profit of
$1,355,000 compared to an operating loss of $89,000 in 1999. These segment
operating profits were offset, in part, by unallocated corporate expenses of
$936,000, an increase of $87,000 over 1999.

         Selling and administrative expenses increased $35,000, or 0.5%, due
principally to higher staffing and related expenses in support of the expanded
sales activity and additional selling and administrative expenses for the
Company's Polish subsidiary which had an additional four months activity in the
current period. As a percentage of sales, selling and administrative expenses
were 18.8% compared to 22.3% in 1999.

         Research and development expenses increased $523,000, or 131.7% from
1999, primarily for ATS and entertainment product applications. Most of the
Company's research efforts, which were and continue to be a significant cost of
its business, are included in cost of sales for applied research for specific
contracts, as well as research for feasibility and technology updates.
Capitalized software development costs for 2000 were $555,000 compared to
$581,000 in 1999. Amortization of software costs, which was charged to cost of
sales, was $596,000 and $651,000 for 2000 and 1999, respectively.

         Interest expense was down $386,000, 34.3% from 1999 reflecting lower
borrowings. Letter of credit and other expenses decreased $79,000 principally
due to decreased bank charges.

         The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.

Fiscal 1999 Versus Fiscal 1998

         The Company had a net income of $2,170,000 or $.29 per share (diluted),
versus a net income of $1,794,000, or $.23 per share (diluted) in 1998.
Operating income was $4,759,000, an increase of $551,000, or 13.1% over 1998.
These increases were primarily the result of higher gross margins reflecting
increased sales of ATS products.

         Total sales decreased slightly $59,000, .2% from 1998 as decreases
domestically and to the U.S. Government were only partially offset by an
increase internationally and the addition of sales from the Company's Polish
subsidiary purchased in April, 1998. Domestic sales decreased $3,640,000, 41.1%,
and represented 17.9% of the Company's total sales, down from 30.2% in the prior
year. The decrease domestically primarily reflected reduced industrial
sterilizer sales coupled with decreased sales of the Company's entertainment
products. Sales to the U.S. Government decreased $1,779,000, 60.6% and
represented 4.0% of the Company's total sales, down from 10.0% for the prior
year. The decrease in U.S. Government sales primarily reflected the completion
in the prior year of a large chamber project. International sales, including
sales of the Company's Polish subsidiary, increased $5,360,000, 30.6% and
represented 78.1% of the Company's total sales. The increase internationally
primarily resulted from additional progress on two large centrifuge projects
including a Centrifuge project for the United Kingdom Ministry of Defense (UK
MOD). Sales in 1999 to the UK MOD were approximately $7.0 million or 24.0% of
the Company's total sales. Open orders for the UK MOD constituted $11.1 million
of the Company's sales backlog at February 26, 1999.

         On a segment basis, sales of the Company's Aircrew Training Systems
(ATS) products, which create and monitor the physiological effects of motion
(including spatial disorientation and centrifugal forces) on humans and
equipment for medical, training, research and entertainment markets were
$24,465,000 an increase of $2,410,000, or 10.9% over 1998. Sales of these
products accounted for 83.7% of the Company's sales compared to 75% in 1998.
Sales in the Company's other segment, the Industrial Group, which designs and
produces chambers that create environments that are used for sterilization,
research and medical applications, decreased $2,469,000 or 34.2%, and accounted
for 16.3% of the Company's total sales compared to 25% in 1998. Although the
primary reduction was in sterilizer sales, decreases were evidenced across all
product lines for this Group.

                                       4
<PAGE>


         Gross profit increased $2,374,000 or 25.5%. As a percentage of sales,
gross profit was 39.9% up from 31.8% in 1998. These increases were attributable
to a product mix shift to higher margin ATS products.

         Operating profit increased $551,000, or 13.1% compared to 1998. On a
segment basis, ATS has an operating profit of $5,697,000, an increase of
$1,466,000 while the Industrial Group had an operating loss of $89,000 compared
to an operating profit of $691,000 in 1998. These segment operating profits were
offset, in part, by unallocated corporate expenses of $849,000, an increase of
$135,000 over 1998.






                                       5
<PAGE>


Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued


         Selling and administrative expenses increased $1,574,000, or 31.8%, due
principally to higher commissions expense on higher commissionable sales,
increased government claim expenses, and the addition of selling and
administrative expenses for the Company's Polish subsidiary. As a percentage of
sales, selling and administrative expenses were 22.3% compared to 16.9% in 1998.

         Research and development expenses increased $249,000, or 168.2% from
1998. Most of the Company's research efforts, which were and continue to be a
significant cost of its business, are included in cost of sales for applied
research for specific contracts, as well as research for feasibility and
technology updates. Capitalized software development costs for 1999 were
$581,000 compared to $395,000 in 1998. Amortization of software costs, which was
charged to cost of sales, was $651,000 and $670,000 for 1999 and 1998,
respectively.

         Interest expense was down $120,000, 9.6% from 1998 reflecting a lower
average interest rate. Letter of credit and other expenses decreased $16,000
principally due to decreased bank charges.

         The Company's provision for taxes, rate-wise, remained unchanged from
the prior year and approximated the statutory rate.

Liquidity and Capital Resources

         At February 23, 2001, the Company had a Credit Agreement with a bank
which provided a credit facility of $15 million. This agreement expires on
August 31, 2002. Substantially all of the company's short-term financing is
provided by this bank. At February 23, 2001, the Company had $4,772,000
available under the credit agreement.

         During fiscal 2001, the company used $6,670,000 of cash for operating
activities. This was primarily the result of an increase in accounts receivable
and reductions in billings in excess of costs and estimated earnings on
uncompleted long-term contracts and customer deposits. Partial offsets were
provided by net income, non-cash charges, and an increase in accrued
liabilities including income taxes. In general, the net use of cash for
operations reflected a build up of current assets, primarily accounts receivable
(which includes claims receivables) and a decrease in current liabilities,
primarily those associated with customer billing and deposits.

         Investing activities used $2,983,000 and consisted of purchases for
capital equipment and capitalized software, partially offset by the purchase of
ETC Europe.

         Financing activities generated $8,943,000 of cash. This included the
net effect of bank borrowing, cash from the issuance of long-term bonds and cash
from the issuance of stock partially offset by an increase in restricted cash.

               At February 23, 2001, the Company was in violation of one of its
Credit Agreement loan covenants, specifically the requirement to maintain a
specified Funds Flow Ratio. This violation resulted from the unusually high
capital spending in the fiscal period for the Company's modernization program in
relation to net income in the fiscal period. Accordingly, the Company received a
waiver for this violation at February 23, 2001 from its Bank and also the Bank
agreed to adjust this covenant for the period through November 23, 2001.

         The Company believes it will be able to meet the revised covenant and
also that cash generated from operating activities as well as available
borrowing under the Credit Agreement will be sufficient to meet its future
obligations.

         In reference to the Company's outstanding claims with both the U.S.
government and an international customer, to the extent the Company is
unsuccessful in further recovery of contract costs, such an event could have a
material adverse effect on the Company's liquidity and results of operations.
Historically, the Company has had good experience in that recoveries have
exceeded claims (see Note 3 of Notes to Consolidated Financial Statements).



                                       6
<PAGE>


Management's Discussion and Analysis of
Financial Condition and Results of Operations - Continued

Market for the Registrant's Common Stock and Related Security Holder Matters

         The Company's Common Stock (the Common Stock) is traded on the American
Stock Exchange under the symbol ETC. As of May 18, 2001, the Company had 303
shareholders of record.

         The following table sets forth the quarterly ranges of high and low
sale prices, and the closing sale price, for shares of the Common Stock for the
periods indicated. Such prices represent quotations between dealers and do not
include mark-ups, markdowns or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>

                                     Sale Prices
                              -------------------------        Closing
                                High              Low        Sale Price
                              --------          -------      ----------
<S>                           <C> <C>           <C>  <C>        <C>  <C>
2001

First Quarter                 $15-5/8           $7-7/8          $9-1/2
Second Quarter                 10-1/2            8-1/8           9-1/16
Third Quarter                   9-3/4            7               7-5/16
Fourth Quarter                  8-3/5            6-3/8           8-2/5

2000

First Quarter                 $14-1/2           $7-15/16       $11-7/8
Second Quarter                 12-1/8            9              10-11/16
Third Quarter                  10-5/8            8-5/8           9-5/8
Fourth Quarter                 21                9-3/8          12-7/8
</TABLE>

         The Company has never paid any cash dividends on the Common Stock in
the past and does not anticipate that any cash dividends will be declared or
paid in the foreseeable future. The Company's current line of credit facility
prohibits the payment of any dividends by the Company without the lender's prior
written consent.

Backlog

         The Company's sales backlog at February 23, 2001 and February 25, 2000,
for work to be performed and revenue to be recognized under written agreements
after such dates, was $40,439,000 and $44,146,000, respectively. In addition,
the Company's training and maintenance contracts backlog at February 23, 2001
and February 25, 2000, for work to be performed and revenue to be recognized
after that date under written agreements, was approximately $1,347,000 and
$1,288,000, respectively. Of the February 23, 2001 backlog, approximately
$32,799,000 was under contracts for ATS and maintenance support including
$23,627,000 for the Walt Disney companies. Approximately 79% of the February 23,
2001 backlog is expected to be completed prior to February 24, 2002.


                                       7

<PAGE>

               Report of Independent Certified Public Accountants


Board of Directors
Environmental Tectonics Corporation


         We have audited the accompanying consolidated balance sheets of
Environmental Tectonics Corporation and Subsidiaries as of February 23, 2001 and
February 25, 2000, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three fiscal
years in the period ended February 23, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
our audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Environmental Tectonics Corporation and Subsidiaries as of February 23, 2001
and February 25, 2000, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended February 23, 2001,
in conformity with accounting principles generally accepted in the United
States.

         As discussed in Note 3 to the consolidated financial statements, the
Company has recorded receivables in the amount of $11.3 million related to
claims made to or against the United States government and an international
customer for contract costs incurred through February 23, 2001. The total net
claims amount made is approximately $26.0 million based on costs incurred
through February 23,2001, and is subject to negotiation, arbitration and audit
by the U.S. government and the international customer.



Philadelphia, Pennsylvania
April 18, 2001


<PAGE>




Consolidated Balance Sheets
($ in thousands, except share data)
<TABLE>
<CAPTION>

                                                                                    February 23,    February 25,
                                                                                        2001            2000
                                                                                     --------        ---------
<S>                                                                                  <C>             <C>
ASSETS
Cash and cash equivalents                                                            $    851        $   1,725
Cash equivalents restricted for letters of credit                                         544               32
Accounts receivable, net                                                               16,776           10,771
Costs and estimated earnings in excess of
     billings on uncompleted long-term contracts                                        9,595            8,878
Inventories                                                                             4,624            3,904
Deferred tax asset                                                                        615              689
Prepaid expenses and other current assets                                                 423              482
                                                                                     --------        ---------
           Total current assets                                                        33,428           26,481

Property, plant and equipment, net                                                      5,337            3,300
Software development costs, net of accumulated
     amortization of $ 5,670  and $ 5,215
     in 2001 and 2000, respectively                                                     1,191            1,096
Other assets                                                                              749            1,020
                                                                                     --------        ---------

           Total assets                                                              $ 40,705        $  31,897
                                                                                     ========        =========
==============================================================================================================
LIABILITIES
Current portion of long-term obligations                                             $    643        $      78
Accounts payable - trade                                                                1,929            1,830
Billings in excess of costs and estimated earnings
     on uncompleted long-term contracts                                                 1,712            3,282
Customer deposits                                                                       1,443            2,935
Accrued income taxes                                                                      754              455
Accrued commissions                                                                       668              517
Other accrued liabilities                                                               1,209            1,078
                                                                                     --------        ---------
           Total current liabilities                                                    8,358           10,175
                                                                                     --------        ---------
Long-term obligations, less current portion:
     Credit facility payable to banks                                                   7,564            4,093
     Long Term Bonds                                                                    5,195                -
     Subordinated debt                                                                      -              350
     Other                                                                                 19               12
                                                                                     --------        ---------
                                                                                       12,778            4,455
                                                                                     --------        ---------
Deferred tax liability                                                                    674              652
                                                                                     --------        ---------

           Total liabilities                                                           21,810           15,282
                                                                                     --------        ---------
Minority Interest                                                                          99              370

STOCKHOLDERS' EQUITY
Common stock - authorized 20,000,000 shares, $.05 par value;
     7,110,546 and 6,864,280 shares issued and
     outstanding in 2001 and 2000, respectively                                           355              343
Capital contributed in excess of par value of common stock                              6,514            5,832
Accumulated other comprehensive loss                                                     (226)             (62)
Retained earnings                                                                      12,153           10,132
                                                                                     --------        ---------

           Total stockholders' equity                                                  18,796           16,245
                                                                                     --------        ---------

           Total liabilities and stockholders' equity                                $ 40,705        $  31,897
                                                                                     ========        =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
================================================================================

<PAGE>


Consolidated Statements of Operations
($ in thousands, except share data)
<TABLE>
<CAPTION>
                                                            Year Ended       Year Ended       Year Ended
                                                            February 23,    February 25,      February 26,
                                                               2001            2000               1999
                                                            ------------    ------------      ------------
<S>                                                          <C>             <C>                <C>
Net sales                                                    $  32,452       $  34,920          $  29,225
Cost of goods sold                                              19,377          22,122             17,553
                                                             ---------       ---------          ---------
           Gross profit                                         13,075          12,798             11,672
                                                             ---------       ---------          ---------
Operating expenses:
     Selling and administrative                                  8,050           6,551              6,516
     Research and development                                      903             920                397
                                                             ---------       ---------          ---------
                                                                 8,953           7,471              6,913
                                                             ---------       ---------          ---------
           Operating income                                      4,122           5,327              4,759
                                                             ---------       ---------          ---------
Other expenses:
     Interest expense (net)                                        825             738              1,124
     Letter of credit fees                                          65              53                 26
     Other, net                                                     34              56                162
                                                             ---------       ---------          ---------
                                                                   924             847              1,312
                                                             ---------       ---------          ---------

           Income before provision for income taxes
             and minority interest                               3,198           4,480              3,447

Provision for income taxes                                       1,126           1,573              1,201
                                                             ---------       ---------          ---------

           Income before minority interest                   $   2,072       $   2,907          $   2,246
                                                             =========       =========          =========

Income attributable to minority interest                            51              70                 76

           Net income                                        $   2,021       $   2,837          $   2,170

Per share information Earnings per common share:
        Basic                                                $     .29       $     .40           $    .32
        Diluted                                              $     .27       $     .36           $    .29

Income available to common stockholders                      $   2,021       $    2,671          $  1,853

     Weighted average common shares:
        Basic                                                7,087,000        6,604,000         5,861,000
        Diluted                                              7,499,000        7,319,000         6,312,000
</TABLE>





The accompanying notes are an integral part of the consolidated financial
statements.

                                       9
<PAGE>


Consolidated Statements of Changes in Stockholders' Equity
($ in thousands, except share data)

 For the years ended February 23, 2001, February 25, 2000, and February 26, 1999
<TABLE>
<CAPTION>
                                                                         Capital
                                                                        contributed
                                                                        in excess of       Accumulated
                                               Common stock             par value of         other                         Total
                                      -------------------------------     common          comprehensive      Retained  stockholders'
                                           Shares         Amount           stock          income (loss)      earnings     equity
                                           ------         ------           -----          -------------      --------     ------
<S>                                        <C>           <C>             <C>                  <C>             <C>          <C>
Balance, February 27, 1998                 3,006,596      $ 300          $ 2,671              $    -          $ 5,608      $ 8,579

Net income for the year                            -          -                -                   -            2,170        2,170
Other comprehensive income                         -          -                -                  21                -           21
                                           ---------      -----          -------              ------          -------      -------
Total comprehensive income                         -          -                -                  21            2,170        2,191
Stock issued in connection with acquisition   55,000          6              489                   -                -          495
Accretion of preferred stock                       -          -                -                   -              (42)         (42)
Dividends on preferred stock                       -          -                -                   -             (275)        (275)
Shares issued in connection with employee
    stock purchase and stock option
    plans                                     21,610          2               80                   -               -            82
                                           ---------      -----          -------              ------          -------      -------
Balance, February 26, 1999                 3,083,206      $ 308          $ 3,240              $   21          $ 7,461      $11,030

Net income for the year                            -          -                -                   -            2,837        2,837
Other comprehensive loss                           -          -                -                 (83)               -          (83)
                                           ---------      -----          -------              ------          -------      -------
Total comprehensive income                         -          -                -                 (83)           2,837        2,754
Stock split effective
    May 28, 1999                           3,083,206          -                -                   -                -            -
Dividend on preferred stock                        -          -                -                   -              (38)         (38)
Accretion of  preferred stock                      -          -                -                   -             (128)        (128)
Shares issued in connection
    with conversion of preferred stock       666,666          33           2,467                   -                -        2,500
Shares issued in connection with
    employee stock purchase and
    stock option plans                        31,202          2              125                   -                -          127
                                           ---------      -----          -------              ------          -------      -------
Balance, February 25, 2000                 6,864,280      $ 343          $ 5,832              $  (62)         $10,132      $16,245

Net income for the year                            -          -                -                   -            2,021        2,021
Other comprehensive loss                           -          -                -                (164)               -         (164)
                                           ---------      -----          -------              ------          -------      -------
Total comprehensive income                         -          -                -                (164)           2,021        1,857
Shares issued in connection
    with conversion of warrants              212,866         10              508                   -                -          518
Shares issued in connection
    with employee stock purchase
    and stock option plans                    33,400          2              174                   -                -          176

Balance, February 23, 2001                 7,110,546      $ 355          $ 6,514              $ (226)         $12,153      $18,796
                                           =========      =====          =======              ======          =======      =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                       10
<PAGE>


Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>

                                                                             Year Ended          Year Ended             Year Ended
                                                                             February 23,        February 25,           February 26,
                                                                                 2001                2000                  1999
                                                                                 ----                ----                  ----
<S>                                                                             <C>               <C>                    <C>
Cash flows from operating activities:
    Net income                                                                  $ 2,021           $  2,837               $ 2,170
    Adjustments to reconcile net income to net cash (used in) provided
       by operating activities
       Depreciation and amortization                                              1,278              1,395                 1,642
       Decrease (increase)in allowance for accounts receivable and inventory        (87)                77                  (409)
       Minority interest                                                           (170)                (6)                   76
       Changes in operating assets and liabilities:
              (Increase) decrease in assets
              Accounts receivable                                                (6,007)            (1,097)               (1,202)
              Costs and estimated earnings in excess of billings on uncompleted
                long-term contracts                                                (717)             1,538                (4,765)
              Inventories                                                          (630)              (888)                  623
              Prepaid expenses and other current assets                               5                145                  (530)
              Other assets                                                           34               (125)                   12
        Increase (decrease) in liabilities:
              Accounts payable                                                       99                276                   112
              Billings in excess of costs and estimated earnings on uncompleted
               long-term contracts                                               (1,570)            (3,493)                5,630
              Customer deposits                                                  (1,492)            (2,761)                4,323
              Accrued income taxes                                                  291               (465)                  (64)
              Other accrued liabilities                                             264                (93)                  637
              Payments under settlement agreements                                  (85)              (120)                 (120)
        Increase (decrease) in deferred income taxes,net                             96                397                  (366)
                                                                                -------            -------               -------
    Net cash (used in) provided by operating activities                          (6,670)            (2,383)                7,769
Cash flows from investing activities:
    Acquisition of equipment                                                     (2,628)            (1,014)                 (567)
    Software development costs capitalized                                         (550)              (555)                 (581)
    Purchase of subsidiary, net of cash acquired                                    195                  -                    60
                                                                                -------            -------               -------
    Net cash used in investing activities                                        (2,983)            (1,569)               (1,088)
                                                                                -------            -------               -------
Cash flows from financing activities:
    Net borrowings (payments)under credit facility                                3,471              4,093                  (467)
    Proceeds from long-term bonds                                                 5,470                  -                     -
    Net payments on subordinated debt                                                 -             (3,774)                    -
    Payment of dividends on preferred stock                                           -                (38)                 (275)
    Deferred financing costs                                                       (175)                 -                     -
    Decrease (increase) in restricted cash                                         (512)                15                   (32)
    Decrease in notes payable - related party                                         -                  -                  (800)
    Net decrease in other long-term obligations                                      (5)               (40)                  (70)
    Proceeds from issuance of common stock/warrants                                 694                160                    82
    Net cash provided by (used in) financing activities                           8,943                416                (1,562)
    Effect of exchange rates on cash                                               (164)               (83)                   21
    Net (decrease) increase in cash and cash equivalents                           (874)            (3,619)                5,119
Cash and cash equivalents at beginning of year                                    1,725              5,344                   225
Cash and cash equivalents at end of year                                        $   851            $ 1,725               $ 5,344
                                                                                =======            =======               =======
Supplemental schedule of cash flow information:
    Interest paid                                                               $   806            $   421               $   925
    Income taxes paid
Supplemental information on non-cash operating and investing activities:        $   649            $ 1,533               $ 1,357
</TABLE>

     During the year ended February 25, 2000, the Company reclassed $216 from
inventory to property, plant and equipment.

     The accompanying notes are an integral part of the consolidated financial
statements.

                                       11
<PAGE>


Notes to Consolidated Financial Statements
($ in thousands, except share data)

1.     Summary of Significant Accounting Policies:

       Nature of Business

       Environmental Tectonics Corporation ("ETC" or the "Company") is primarily
       engaged in the development, marketing and manufacturing of Aircrew
       Training Systems (ATS) and industrial simulation equipment. The Company
       utilizes its internally developed software systems in virtually all of
       its products. ETC focuses on software enhancements, product extensions,
       new product development and new marketplace applications. Sales of ATS
       products are made principally to U.S. and foreign government agencies and
       to the entertainment market. Sales of industrial simulation equipment,
       which includes sterilizers, environmental systems, and hypo/hyperbaric
       equipment, are made to both commercial customers and governmental
       agencies worldwide.

       Stock Split: On February 25, 1999, the Company's Board of Directors
       declared a 2-for-1 stock split for stockholders of record on May 17,
       1999. All earnings per share and share amounts in the financial
       statements for all years presented have been restated to reflect the
       2-for-1 split.

       Principles of Consolidation:

       The consolidated financial statements include the accounts of
       Environmental Tectonics Corporation, its wholly owned subsidiary, ETC
       International Corporation and its 95% owned subsidiary, ETC-PZL Aerospace
       Industries SP. Z 0.0, and its 99% owned subsidiary, ETC Europe. All
       material inter-company accounts and transactions have been eliminated.
       The Company's fiscal year is the 52- or 53-week annual accounting period
       ending the last Friday in February.

       Use of Estimates:

       In preparing financial statements in conformity with accounting
       principles generally accepted in the United States, management is
       required to make estimates and assumptions that affect the reported
       amounts of assets and liabilities, the disclosure of contingent assets
       and liabilities at the date of the financial statements, and revenues and
       expenses during the reporting period. Actual results could differ from
       those estimates. Significant estimates are made for revenue recognition
       under the percentage of completion method (see Note 1, Revenue
       Recognition), claims receivable, inventory, and computer software costs.

       The Company has recorded receivables in the amount of $11.3 million for
       claims made or to be made against the United States government and an
       international customer for contract costs incurred through February 23,
       2001. The total net claims amount filed with the U.S. government and an
       international customer is approximately $26.0 million based on costs
       incurred through February 23, 2001, and additional claims are in
       preparation for filing in fiscal 2002 against an international customer.
       These claims are subject to negotiation, arbitration and audit by the
       United States government and the international customer.

       Revenue Recognition:

       Revenue is recognized on long-term contracts utilizing the percentage of
       completion method based on costs incurred as a percentage of estimated
       total costs. Revenue recognized on uncompleted long-term contracts in
       excess of amounts billed to customers is reflected as an asset. Amounts
       billed to customers in excess of revenue recognized on uncompleted
       long-term contracts are reflected as a liability. When it is estimated
       that a contract will result in a loss, the entire amount of the loss is
       accrued. The effect of revisions in cost and profit estimates for
       long-term contracts is reflected in the accounting period in which the
       facts requiring the revisions become known. Contract progress billings
       are based upon contract provisions for customer advance payments,
       contract costs incurred, and completion of specified contract milestones.
       Contracts may provide for customer retainage of a portion of amounts
       billed until contract completion. Retainage is generally due within one
       year of completion of the contract. Revenue for contracts under $100, or
       to be completed in less than one year, and revenue on parts and services,
       are recognized as shipped. Revenue for service contracts is recognized
       ratably over the life of the contract with related material costs
       expensed as incurred.

            In September 2000, the Emerging Issues Task Force reached a
       consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and
       costs" (Issue 00-10). Issue 00-10 requires that all amounts billed to
       customers related to shipping and handling should be classified as
       revenues. In addition, Issue 00-10 specifies that the classification of
       shipping and handling costs is an accounting policy decision that should
       be disclosed pursuant to APB 22, "Disclosure of Accounting Policies". The
       Company's product costs includes amounts for shipping and handling,
       therefore, it charges its customers shipping and handling fees at the
       time the products are shipped or when its services are performed. The
       cost of shipping products to the customer is recognized at the time the
       products are shipped to the customer and is included in Cost of Goods
       Sold expenses. Accordingly, this consensus opinion had no effect on the
       Company's current and previous classifications.

                                       12
<PAGE>

Notes to Consolidated Financial Statements
($ in thousands, except share data)

1.     Summary of Significant Accounting Policies (Continued):

       Cash and Cash Equivalents:

       Cash and cash equivalents include short-term deposits at market interest
       rates with original maturities of three months or less. The Company
       maintains cash balances at several financial institutions located in the
       Northeast United States and at some locations internationally. Accounts
       in each domestic institution are insured by the Federal Deposit Insurance
       Corporation up to $100. During the year the Company had cash and cash
       equivalents in excess of insured amounts. However, most of the Company's
       funds are with one financial institution which has had no experience of
       significant customer losses to date.

       Inventories:

       Inventories are valued at the lower of cost or market. Cost is determined
       principally by the first-in, first-out method. The costs of finished
       goods and work-in-process inventories include material, direct
       engineering, manufacturing labor and overhead components. The Company
       periodically reviews the net realizable value of the inventory and, if
       necessary, writes down the recorded costs.

       Depreciation of Property, Plant and Equipment:

       Property, plant and equipment are depreciated over their estimated useful
       lives by the straight-line method for financial reporting purposes.
       Accelerated depreciation methods are used for tax purposes. Upon sale or
       retirement of property, plant and equipment, the costs and related
       accumulated depreciation are eliminated from the accounts. Any resulting
       gains or losses are included in the determination of net income.

       Amortization of Goodwill:

       The Company amortizes costs in excess of fair values of net assets of the
       businesses acquired using the straight - line method over a period not to
       exceed 20 years. The Company periodically reviews the value of its
       goodwill to determine if an impairment has occurred.

       Goodwill of $662 was recorded in fiscal 1999 for the Company's 65%
       ownership purchase of ETC-PZL Aerospace Industries, SP. Z O.O. On
       September 27, 2000, the Company purchased an additional 30% ownership for
       $300 cash, bringing the Company's total ownership to 95%. This
       transaction resulted in a reduction in goodwill of $101. Amortization
       expense was $35, $36, and $25 in fiscal years 2001, 2000 and 1999,
       respectively, and accumulated amortization was $96 and $61 as of February
       23, 2001 and February 25, 2000, respectively.

       Amortization of Capitalized Software Development Costs:

       The Company capitalizes the qualifying costs of developing software
       contained in certain products. Capitalization of costs requires that
       technological feasibility has been established. When the software is
       fully documented and tested, capitalization of development costs cease
       and amortization commences over a period ranging from 36 to 60 months
       (dependent upon the life of the product) on a straight-line basis which,
       at a minimum, approximates estimated sales. Realization of capitalized
       software costs is subject to the Company's ability to market the related
       product in the future and generate cash flows to support future
       operations. Capitalized software costs and related amortization totaled $
       550 and $455, respectively, for the year ended February 23, 2001.
       Capitalized software costs and related amortization totaled $555 and
       $596, respectively, for the year ended February 25, 2000.

       Amortization of Deferred Financing Costs:

       Capitalized costs relating to the March 1997 financing of the Company are
       being amortized over the respective terms of each agreement.
       Additionally, expenses totaling $175 relating to the Company's bond
       issuance on March 15, 2000 are being amortized over the relevant term.
       Amortization expense relating to deferred financing costs was $146, $331
       and $181 in 2001, 2000, and 1999, respectively (see note 7).

                                       13
<PAGE>

Notes to Consolidated Financial Statements
($ in thousands, except share data)

1.     Summary of Significant Accounting Policies (Continued):

       Income Taxes:

       The Company accounts for income taxes using the liability method, which
       reflects the impact of temporary differences between values recorded for
       assets and liabilities for financial reporting purposes and values
       utilized for measurement in accordance with tax laws.

       Long-Lived Assets:

       The Company follows the provisions of Statement of Financial Accounting
       Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
       Assets and for Long-Lived Assets to Be Disposed Of," which provides
       guidance on when to recognize and how to measure impairment losses of
       long-lived assets and certain identifiable intangibles, and how to value
       long-lived assets to be disposed of. The adoption of SFAS No. 121 had no
       material effect on the Company's consolidated financial position or
       results of operations.

       Stock Options:

       The Company accounts for stock options in accordance with SFAS No. 123,
       "Accounting for Stock-Based Compensation," which contains a fair
       value-based method for valuing stock-based compensation that entities may
       use, which measures compensation cost at the grant date based on the fair
       value of the award. Compensation is then recognized over the service
       period, which is usually the vesting period. Alternatively, the standard
       permits entities to continue accounting for employee stock options and
       similar instruments under Accounting Principles Board (APB) Opinion No.
       25, "Accounting for Stock Issued to Employees." Entities that continue to
       account for stock options using APB Opinion No. 25 are required to make
       pro forma disclosures of net income and earnings per share, as if the
       fair value-based method of accounting defined in SFAS No. 123 had been
       applied (see note 12). The Company's Incentive Stock Option Plan is
       accounted for under APB Opinion No. 25.

       Advertising Costs:

       The Company expenses advertising costs (which include trade shows) as
       incurred. Advertising expense was $345, $270 and $294 in 2001, 2000, and
       1999, respectively.

       Earnings Per Common Share:

       The Company has adopted SFAS No. 128, "Earnings Per Share," which is
       effective for financial statements issued after December 15, 1997. The
       new standard eliminates primary and fully diluted earnings per share and
       requires presentation of basic and diluted earnings per share together
       with disclosure of how the per share amounts were computed. Basic
       earnings per share excludes dilution and is computed by dividing income
       available to common shareholders by the weighted average common shares
       outstanding for the period. Diluted earnings per share reflects the
       potential dilution that could occur if securities or other contracts to
       issue common stock were exercised and converted into common stock or
       resulted in the issuance of common stock that then shared in the earnings
       of the entity.
                                       14
<PAGE>

Notes to Consolidated Financial Statements
($ in thousands, except share data)

1.     Summary of Significant Accounting Policies (Continued):

       The following table illustrates the reconciliation of the numerators and
       denominators of the basic and diluted earnings per share computations.
       All earnings per share and share amounts have been restated to reflect a
       2 for 1 stock split effective May 28, 1999.
<TABLE>
<CAPTION>
                                                                               Year ended February 23, 2001
                                                              --------------------------------------------------------------
                                                                                    Weighted
                                                                                    average                  Per share
                                                              Income($000)           shares                   amount
                                                              ------------           ------                   ------
                                                              (numerator)         (denominator)
<S>                                                           <C>                     <C>                     <C>
       Net income                                               $   2,021

       Basic earnings per share
            Income available to common stockholders             $   2,021               7,087,163               $   .29
                                                                =========               =========               =======

       Effective of dilutive securities

            Stock options                                                                  97,653
            Stock warrants                                                                313,901
                                                                                        ---------

       Diluted earnings per share
            Income available to common stockholders plus
                 effect of dilutive securities                  $   2,021               7,498,717               $   .27
                                                                =========               =========               =======
</TABLE>
<TABLE>
<CAPTION>
                                                                               Year ended February 25, 2000
                                                              --------------------------------------------------------------
                                                                                    Weighted
                                                                                    average                  Per share
                                                              Income($000)           shares                   amount
                                                              ------------           ------                   ------
                                                              (numerator)         (denominator)
<S>                                                           <C>                     <C>                     <C>
       Net income                                               $   2,837
       Less preferred stock dividends                                 (38)
       Less accretion of preferred stock                             (128)
                                                                ---------

       Basic earnings per share
            Income available to common stockholders             $   2,671               6,604,184               $   .40
                                                                =========                                       =======

       Effective of dilutive securities
            Stock options                                                                 224,151
            Stock warrants                                                                490,358
                                                                                       ----------

       Diluted earnings per share
            Income available to common stockholders plus
                 effect of dilutive securities                  $   2,671               7,318,693               $   .36
                                                                =========               =========               =======
</TABLE>


<TABLE>
<CAPTION>
                                                                               Year ended February 26, 1999
                                                              --------------------------------------------------------------
                                                                                    Weighted
                                                                                    average                  Per share
                                                              Income($000)           shares                   amount
                                                              ------------           ------                   ------
                                                              (numerator)         (denominator)
<S>                                                           <C>                     <C>                     <C>
       Net income                                               $   2,170
       Less preferred stock dividends                                (275)
       Less accretion of preferred stock                              (42)
                                                                ---------

       Basic earnings per share
           Income available to common stockholders              $   1,853               5,861,377               $   .32
                                                                ---------               ---------               -------

       Effective of dilutive securities
           Stock options                                                                   38,641
           Stock warrants                                                                 412,007
                                                                                        ---------

       Diluted earnings per share
           Income available to common stockholders plus
                 effect of dilutive securities                  $   1,853               6,312,025               $   .29
                                                                ---------               ---------               -------
</TABLE>

       There were conversion provisions of preferred stock totaling 666,666
       shares of common stock which were not included in the computation of
       diluted earnings per share because the effect of assumed conversions was
       anti-dilutive. These conversion provisions were not outstanding at
       February 23, 2001.

                                       15
<PAGE>

Notes to Consolidated Financial Statements
($ in thousands, except share data)

1.     Summary of Significant Accounting Policies (Continued):

       Reporting Comprehensive Income:

       In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
       No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
       standards to provide prominent disclosure of comprehensive income items.
       Comprehensive income is the change in equity of a business enterprise
       during a period from transactions and other events and circumstances from
       non-owner sources. SFAS No. 130 is effective for all periods beginning
       after December 15, 1997. Other comprehensive income consists of foreign
       currency translation adjustments. The adoption of SFAS No. 130 did not
       have a material impact on the Company's consolidated financial position
       or results of operations.

       Business Segment Presentation:

       In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
       of an Enterprise and Related Information." SFAS No. 131 requires that
       public business enterprises report certain information about operating
       segments in complete sets of financial statements of the enterprise and
       in condensed financial statements of interim periods issued to
       shareholders. It also requires that public business enterprises report
       certain information about their products and services, the geographic
       areas in which they operate, and their major customers. SFAS No. 131 is
       effective for all periods beginning after December 15, 1997. The adoption
       of SFAS No. 131 had no impact on the Company's consolidated financial
       position or results of operations.

       Derivative Financial Instruments:

       In January, 2001, the FASB issued SFAS No. 133, "Accounting for
       Derivative Instruments and Hedging Activities". SFAS No. 133 requires the
       recognition of all derivative financial instruments as either assets or
       liabilities in the Consolidated Balance Sheet, and the periodic
       adjustment of those instruments to fair value. The classification of
       gains and losses resulting from changes in the fair value of derivatives
       is dependent on the intended use of the derivative and its resulting
       designation. Adjustments to reflect changes in fair values of derivatives
       that are not considered highly effective hedges are reflected in
       earnings. Adjustments to reflect changes in fair values of derivatives
       that are considered highly effective hedges are either reflected in
       earnings and largely offset by corresponding adjustments related to the
       fair values of the hedged items, or reflected in other comprehensive
       income until the hedged transaction matures and the entire transaction is
       recognized in earnings. The change in fair value of the ineffective
       portion of a hedge is immediately recognized in earnings. SFAS No. 133 is
       effective for all periods beginning after June 15, 1999. This effective
       date was later deferred to all periods beginning after June 15, 2000 by
       SFAS No. 137, "Accounting for Derivative Instruments and Hedging
       activities-Deferral of the Effective Date of FASB Statement Number 133."
       The adoption of SFAS No. 133 had no impact on the Company's consolidated
       financial position or results of operations.

2.     Acquisitions

       ETC-PZL Aerospace Industries SP. Z 0.0.
       ---------------------------------------

       On April 21, 1998, the Company acquired a 65% ownership in MP-PZL
       Aerospace Industries, Ltd. ("MP-PZL"), a simulation and advanced training
       device manufacturing company located in Warsaw, Poland, for $375 in cash,
       an 8% interest-only three-year note payable for $350 and 55,000 shares of
       the Company's common stock amounting to $495. MP-PZL was subsequently
       renamed ETC-PZL Aerospace Industries SP. Z O.O. ("ETC-PZL"). The
       Company's cost for this acquisition was $1,220 and has been recorded in
       the accompanying balance sheet under the purchase method of accounting
       for business combinations. In connection with the acquisition, the
       Company recorded goodwill of $662 and a minority interest of $300.

                                       16
<PAGE>

Notes to Consolidated Financial Statements
($ in thousands, except share data)

2.     Acquisitions (Continued):

       ETC-PZL's fiscal period ends December 31. The results of ETC-PZL for the
       period May 1, 1998 through December 31, 1998 have been included in the
       Company's results of operations for the twelve months ended February 26,
       1999. On a pro forma basis, had the Company consolidated the results of
       ETC-PZL for a full 12 months in 1999, the following comparisons would
       result:

       Twelve months ended:
<TABLE>
<CAPTION>
                                                                February 25,        February 26,         February 26,
                                                                   2000                1999                  1999
                                                                   ----                ----                  ----
                                                                                   (as reported)         (pro forma)

<S>                                                             <C>                  <C>                   <C>
       Net sales                                               $   34,920           $   29,225            $   29,841

       Gross profit                                                12,798               11,672                11,906

       Operating income                                             5,327                4,759                 4,723

       Net income                                                   2,837                2,170                 2,155

       Per share information
       Income available to common shareholders                      2,671                1,853                 1,838
       Income per share: basic                                       0.40                 0.32                  0.31
       Income per share: diluted                                     0.36                 0.29                  0.29
       Number of shares: basic                                  6,604,000            5,861,000             5,861,000
       Number of shares: diluted                                7,319,000            6,312,000             6,312,000
</TABLE>

       On September 9, 2000, the Company purchased an additional 30% ownership
       interest in ETC-PZL for $300 cash, bringing the Company's total ownership
       to 95%. This transaction resulted in a reduction in goodwill of $101.

       Pro-Pilot Assets
       ----------------

       During the quarter ended November 24, 2000, the Company purchased the
       assets of the "Pro-Pilot" flight simulation game for $400. This purchase
       was classified as an asset purchase and thus no goodwill resulted from
       the transaction.

3.     Accounts Receivable:

       The components of accounts receivable at February 23, 2001 and February
       25, 2000, are as follows:
<TABLE>
<CAPTION>

                                                                                        2001              2000
                                                                                        ----              ----
<S>     <C>                                                                        <C>                 <C>
          U.S. government receivables billed
              and unbilled contract costs
              subject to negotiation                                                 $ 5,707             $ 5,145
          U.S. commercial receivables billed                                           2,484               1,395
          International receivables billed and unbilled
           contract costs subject to negotiation                                       8,955               4,598
                                                                                     -------             -------
                                                                                      17,146              11,138
          Less allowance for doubtful accounts                                          (370)               (367)
                                                                                     -------             -------
                                                                                     $16,776             $10,771
                                                                                     =======             =======
</TABLE>

                                       17
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

3.      Accounts Receivable (Continued):

        U.S. government receivables billed and unbilled contract costs subject
        to negotiation:

        Unbilled contract costs subject to negotiation represent claims made or
        to be made against the U.S. government under a contract for a
        centrifuge. These costs were recorded beginning in fiscal year 1994,
        including $1,148 recorded during the three months ended May 26, 2000.
        The Company has recorded claims, amounting to $3,898 to the extent of
        contract costs incurred, and accounts receivable of $1,649 representing
        the balance due under the contract, collectibility of which may be
        dependent upon resolution of outstanding claims. Claim costs have been
        incurred in connection with U.S. government caused delays, errors in
        specifications and designs, and other unanticipated causes, and,
        although classified as current in the financial statements, may not be
        received in full during fiscal 2002. In accordance with accounting
        principles generally accepted in the United States of America, revenue
        recorded by the Company from a claim does not exceed the incurred
        contract costs related to the claim. The Company currently has
        approximately $12.0 million in claims filed with the U.S. government
        (including the aforementioned recorded claim and accounts receivable
        balances) which are subject to negotiation and audit by the U.S.
        government. The U.S. government has responded to the claims with either
        denials or deemed denials that the Company has appealed. In May 2000,
        the Company and the U.S. government reached an agreement in principle,
        which would have included resolution of all U.S. Navy claims on a global
        basis and contracted additional work on the centrifuge. In July 2000,
        the Company received notice that the Navy, citing an inability to obtain
        the prerequisite approvals and thus the necessary funding to effect the
        settlement, was rescinding the agreement.


        International receivables billed:

        International receivables billed included $930 at February 23, 2001 and
        February 25, 2000 related to a certain contract with the Royal Thai Air
        Force.

        In October 1993, the Company was notified by the Royal Thai Air Force
        (RTAF) that the RTAF was terminating a certain $4.6 million simulator
        contract with the Company. Although the Company had performed in excess
        of 90% of the contract, the RTAF alleged a failure to completely
        perform. In connection with the termination, the RTAF made a call on a
        $229 performance bond, as well as a draw on an approximately $1.1
        million advance payment letter of credit. Work under this contract had
        stopped while under arbitration, but on October 1, 1996, the Thai Trade
        Arbitration Counsel rendered its decision under which the contract was
        reinstated in full and the Company was given a period of nine months to
        complete the remainder of the work. Except as noted in the award, the
        rights and obligations of the parties remain as per the original
        contract including the potential invoking of penalties or termination of
        the contract for delay. On December 22, 1997, the Company successfully
        performed acceptance testing and the unit passed with no discrepancy
        reports. Although the contract was not completed in the time allotted,
        the Company has requested an extension on the completion time due to
        various extenuating circumstances, including allowable "force majeure"
        events. The balance due on the contract is still under review. However,
        the Company has received a letter from the Directorate of Finance for
        the RTAF which notes that the Directorate has instructed the Ministry of
        Finance to return $229 of the balance, representing the performance
        bond, and states the Ministry is currently working on the approval. At
        this point, the Company is not able to determine what, if any, impact
        the extended completion and payment period will have upon the receipt of
        the total due.

        Unbilled contract costs subject to negotiation represent claims made or
        to be made against an international customer for three contracts
        covering 1994 to the present. Claims aggregating $5,758 have been
        recorded in connection with costs associated with customer caused
        delays, errors in specifications and designs, and other out-of-scope
        items and may not be received in full during fiscal 2002. In accordance
        with accounting principles generally accepted in the United States of
        America, revenue recorded by the Company from a claim does not exceed
        the incurred contract costs related to the claim. One of these claims
        was settled in the fourth quarter of fiscal 2001, and another claim was
        formally filed with the customer subsequent to fiscal year end. The
        company is currently updating and finalizing additional claims. As a
        related item, during fiscal 2000 the aforementioned international
        customer, citing failure to deliver product within contract terms,
        assessed liquidated damages totaling approximately $1.6 million on two
        contracts currently in progress. The Company disputes the basis for


                                       18

<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

        these liquidated damages and plans to contest them vigorously. However,
        following accounting principles generally accepted in the United States
        of America, the Company reduced contract values and corresponding
        revenues by approximately $1.6 million.

        Claim bookings for the year increased operating income by $1,325 in
        fiscal 2001, net of associated manufacturing costs and legal expenses.

4.      Costs and Estimated Earnings on Uncompleted Contracts:

        The following is a summary of long-term contracts in progress at
        February 23, 2001 and February 25, 2000:

<TABLE>
<CAPTION>
                                                                                        2001              2000
                                                                                        -----------------------
          <S>                                                                             <C>              <C>
          Costs incurred on uncompleted long-term contracts                            $ 30,251         $ 23,468
          Estimated earnings                                                             10,209           14,937
                                                                                       --------         --------
                                                                                         40,460           38,405
          Less billings to date                                                         (32,577)         (32,809)
                                                                                       ---------        --------

                                                                                       $  7,883         $  5,596
                                                                                       ========         ========
</TABLE>


                                       19
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

4. Costs and Estimated Earnings on Uncompleted Contracts (Continued):
<TABLE>
<CAPTION>
                                                                                        2001              2000
                                                                                        ----              ----
           <S>                                                                            <C>              <C>
          Included in accompanying balance sheets under the following captions:
              Costs and estimated earnings in excess of billings
                 on uncompleted long-term contracts                                   $   9,595         $  8,878
              Billings in excess of costs and estimated earnings on
                 uncompleted long-term contracts                                         (1,712)          (3,282)
                                                                                      ----------        ---------

                                                                                      $   7,883         $  5,596
                                                                                      =========         ========
</TABLE>

        Included in billings in excess of costs and estimated earnings on
        uncompleted long-term contracts is a provision for anticipated losses on
        contracts of $200 and $306 in 2001 and 2000, respectively.

5.      Inventories:

        Inventories consist of the following:
<TABLE>
<CAPTION>
                                                                      Raw             Work in
                                                                   material            process            Total
                                                                   --------          -----------        ----------
              <S>                                                     <C>                <C>               <C>
           February 23, 2001                                       $  359             $ 4,265            $ 4,624
           February 25, 2000                                          343               3,561              3,904
</TABLE>

        Inventory is presented net of an allowance for obsolescence of $ 630 and
        $ 720 in 2001 and 2000, respectively.

6.      Property, Plant and Equipment:

        The following is a summary of property, plant and equipment, at cost,
        and estimated useful lives at February 23, 2001 and February 25, 2000:
<TABLE>
<CAPTION>
                                                                                                         Estimated
                                                                                                           useful
                                                                       2001             2000               lives
                                                                       ----             ----            ----------
          <S>                                                           <C>             <C>                <C>
          Land                                                         $  100          $    100
          Building and building additions                               3,260             1,908           40 years
          Machinery and equipment                                       8,039             6,865         3- 5 years
          Office furniture and equipment                                1,180             1,039           10 years
          Building improvements                                         1,393             1,392         5-10 years
                                                                       ------          --------
                                                                       13,972            11,304
          Less accumulated depreciation                                (8,635)           (8,004)
                                                                       -------         --------

              Property, plant and equipment, net                       $5,337          $  3,300
                                                                       ======          ========
</TABLE>

        Depreciation expense for the years ended February 23, 2001, February 25,
        2000, and February 26, 1999, was $ 602, $ 535 and $ 707, respectively.

                                       20
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

7.      Long-Term Obligation and Credit Arrangements:

        Long-term obligations at February 23, 2001 and February 25, 2000 consist
        of the following:
<TABLE>
<CAPTION>
                                                                                          2001             2000
                                                                                          ----             ----
            <S>                                                                           <C>             <C>
           Credit facility payable to banks                                             $  7,564        $  4,093
           Long Term Bonds                                                                 5,470               -
           Subordinated debt, net                                                            350             350
           Products liability settlement (net of unamortized discount of
               $ 37 in 2000 based on imputed rate of 11%)                                      -              48
           Term loans payable accruing interest at between 9% and 9.9%
               collateralized by priority liens on certain equipment                          37              42
                                                                                        --------        --------
                                                                                          13,421           4,533
           Less current portion                                                             (643)            (78)
                                                                                        --------        --------
                                                                                        $ 12,778        $  4,455
                                                                                        ========        ========
</TABLE>

        The amounts of future long-term obligations maturing in each of the next
        five fiscal years are as follows:

        2002                      $   643
        2003                        7,845
        2004                          281
        2005                          281
        2006 and thereafter         4,371
                                   ------
       Total future obligations   $13,421

       The approximate average loan balance, maximum aggregate borrowings
       outstanding at any month-end payable under the credit facility and
       subordinated debt during the fiscal years, and weighted average interest
       rate computed by the days outstanding method as of February 23, 2001 and
       February 25, 2000 are as follows:
<TABLE>
<CAPTION>
                                                                 2001              2000
                                                                 ----              ----
           <S>                                                    <C>               <C>

          Approximate average loan balance                     $   3,764         $    575
          Maximum aggregate                                    $   7,564         $  5,393
          Weighted average interest rate                            8.74%            8.16%
</TABLE>

       Interest is charged on direct borrowings at the bank's prime rate less a
       factor ranging from 0% to 0.5% based on the Company's Leverage Ratio, as
       defined, or adjusted LIBOR in 2001 and 2000. The interest rates ranged
       from 7.85% to 8.83% at February 23, 2001 and 8.1% at February 25, 2000.

       The Company's letter of credit limit is $5.0 million, provided that the
       cumulative of all outstanding trade letters of credit does not exceed
       $2.5 million. The balance outstanding under these provisions at February
       23, 2001, was $2,442. Fees on letters of credit outstanding were 0.75% at
       both February 23, 2001 and February 25, 2000.


                                       21

<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

7.      Long-Term Obligation and Credit Arrangements (Continued):


        On February 25, 2000, the Company signed an amendment to its revolving
        Credit Agreement originally entered into on March 27, 1997, which
        increased its credit facility to $15 million and extended its expiration
        date to August 31, 2002. These funds are available to support working
        capital needs and letter of credit. Terms and conditions of the
        amendment remained essentially the same as the original agreement. The
        Credit Agreement is collateralized by substantially all of the Company's
        assets. The Company is prohibited from declaring any cash dividends
        under the terms of the Credit Agreement. This facility bears interest at
        the bank's prime lending rate less a factor ranging from 0% to 0.5%
        based on the Company's Leverage Ratio, as defined, or adjusted LIBOR. A
        commitment fee of 0.2% is charged for unused available funds. The credit
        facility includes certain covenants related to, among other things,
        prohibitions on incurring additional debt, change in ownership of
        certain officers, payment of dividends and maintenance, on a quarterly
        basis, of certain financial ratios. Substantially all of the Company's
        short-term financing is provided by this bank. The Company had $4,772
        available under the Credit Agreement at February 23, 2001.

        At February 23, 2001, the Company was in violation of one of its Credit
        Agreement loan covenants, specifically the requirement to maintain a
        specified Funds Flow Ratio. This violation resulted from the unusually
        high capital spending for the Company's modernization program in
        relation to net income in the fiscal period. Accordingly, the Company
        received a waiver for this violation at February 23, 2001, from its Bank
        and also the bank agreed to adjust this covenant for the period through
        November 23, 2001.

        On March 27, 1997, the Company issued $4 million of subordinated
        debentures, bearing interest at 12% per annum, due March 27, 2004, to a
        financial institution, a director of which has been subsequently
        appointed and elected to the Company's Board of Directors. On January
        11, 2000, the Company utilized $4.1 million of its revolving credit
        facility to repay these subordinated debentures. See also commentary
        concerning long term bonds. In connection with the subordinated
        debentures, warrants were issued to acquire 332,820 shares of the
        Company's common stock at an exercise price of $.50 per share; $499 of
        the proceeds from the sale of the debentures was allocated to the
        warrants and credited to capital contributed in excess of par value of
        common stock. This amount is being amortized to interest expense over
        the term of the warrants, which is seven years.

        On March 27, 1997, the Company also issued 25,000 shares of 11%
        redeemable convertible preferred stock for $2.5 million. Each share of
        convertible stock was convertible, at the option of the shareholder,
        into 26.66 shares of the Company's common stock at a price of $3.75 per
        share. On February 26, 1999, the Company issued a redemption notice to
        redeem the outstanding 25,000 shares of Series A Preferred Stock in
        their entirety. On March 25, 1999, the Company received notice that
        Sirrom Capital Corporation had exercised its conversion privilege under
        the terms of the agreement to convert its 25,000 shares of Series A
        Preferred Stock into the Company's common shares. Consequently, on April
        19, 1999, the Series A Preferred was retired and 666,666 shares of
        common stock were issued to Sirrom Capital Corporation. Concurrent with
        this transaction the Company charged retained earnings for $128
        representing the difference between book and face value of the Preferred
        Stock and then reclassed $2,500 of Preferred Stock value to common stock
        at par and additional paid in capital.

        Total financing fees associated with the March 27, 1997 financing were
        approximately $876, all of which had been charged to interest expense or
        accreted to retained earnings by February 25, 2000. The proceeds from
        these transactions were used to repay, in full, amounts outstanding with
        a prior lender.

        Subordinated debt at February 25, 2001, consisted of debt issued for the
        acquisition of ETC-PZL (see note 2).


                                       22
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

7.      Long-Term Obligation and Credit Arrangements (Continued):

        As a condition to the extension of the prior credit facility through
        March 31, 1997, warrants were issued to an affiliate of a Bank to
        purchase 200,000 shares of the Company's common stock at a price equal
        to $2.59. On March 6, 2000, these warrants were exercised and the
        Company received $518 representing the full purchase price.
        Subsequently, on March 20, 2000, the Company issued 212,866 shares
        (representing the original warrant value as adjusted) of its common
        shares.

        On March 15, 2000, the Company issued approximately $5.5 million of
        unregistered Taxable Variable Rate Demand/Fixed Rate Revenue Bonds
        (Series of 2000). Net proceeds from these bonds were used to repay a
        $4.1 million advance taken on the Company's revolving credit facility
        and to finance construction of an addition to the Company's main plant
        in Southampton, Pennsylvania. The bonds are secured by a $5.6 million
        irrevocable direct pay Letter of Credit issued by the Company's main
        lender which expires on March 15, 2005 and which is secured by all
        assets of the Company. The Bonds carry a maturity date of April 1, 2020,
        bear a variable interest rate which adjusts each week to a rate required
        to remarket the bonds at full principal value (currently at 4.15% on May
        17, 2001 ) with a cap of 17%, and are subject to mandatory redemption of
        $275 per year for 19 years and $245 for the 20th year.

        Product Liability Settlement:

        During June 1995, the Company entered into a settlement with the
        employee of a customer who brought a products liability claim against
        the Company. The settlement of $1,195 was to be satisfied with (i) funds
        of $547 (including accrued interest) previously deposited by the
        Company's products liability insurance carrier with the U.S. District
        Court, and (ii) a settlement payable to the plaintiff for the remaining
        amount of $648. The Company paid $53 by July 20, 1995 and $100 on April
        20, 1996. In September 1996, the Company renegotiated the payment
        schedule, agreeing to pay, beginning October 1996, $10 per month. The
        claimant did reserve the right to pursue additional payment amounts as
        per the original settlement agreement of July 29, 1995. This settlement
        was fully satisfied as of February 23, 2001.

        The carrying value of the aforementioned financial instruments
        approximates their fair values at February 23, 2001.

8.      Related Parties:


        ETC Europe:
        The Company transacts its business in Europe through ETC Europe, an
        affiliated entity which at February 25, 2000, was 99% owned by the
        President of the Company. Sales through ETC Europe were $6,025 and
        $1,957 in 2000 and 1999, respectively. Amounts due from ETC Europe as of
        February 25, 2000 and February 26, 1999, were $56. Effective March 7,
        2000, the Company completed the purchase for $100 of the 99% ownership
        held by the President of the Company, resulting in goodwill of $26.

        Subordinated Debt and Preferred Stock:
        During 2000, a director of ETC was also a director of one of its
        creditors (see note 7 ).

9.      Leases:
        Operating Leases:

        The Company leases certain premises and office equipment under operating
        leases which expire over the next five years. Future minimum rental
        payments required under noncancellable operating leases having a
        remaining term expiring after one fiscal year as of February 23, 2001
        are $188 in 2002; $133 in 2003; $132 in 2004; $119 in 2005; and $122 in
        2006 and thereafter.

        Total rental expense for all operating leases for the years ended
        February 23, 2001, February 25, 2000, and February 26, 1999, was $ 117,
        $39, and $69, respectively.

                                       23
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

10.     Income Taxes:

        The components of the provision for income taxes are as follows:

                                    Year Ended    Year Ended     Year Ended
                                    February 23,  February 25,   February 26,
                                       2001          2000           1999
                                    ------------  ------------   ------------
        Currently payable:
         Federal                      $  911       $  889          $ 1,272
         State                           109          179              184
         Foreign taxes                    73          108              111
                                      ------       ------          -------
                                       1,088        1,176            1,567
                                      ------       ------          -------

        Deferred:
         Federal                          88          360             (333)
         State                             8           37              (33)
                                      ------       ------          -------
                                          96          397             (366)
                                      ------       ------          -------
                                      $1,184       $1,573           $1,201
                                      ======       ======          =======

        A reconciliation of the statutory federal income tax to the effective
        tax is as follows:
<TABLE>
<CAPTION>
                                                            Year Ended     Year Ended     Year Ended
                                                            February 23,   February 25,   February 26,
                                                               2001           2000           1999
                                                           ------------   ------------   ------------
         <S>                                                   <C>            <C>            <C>
        Statutory income tax                                  34.0%          34.0%          34.0%
        State income tax, net of federal tax benefit and
          state net operating loss carryforwards in 1999       2.2            2.9            3.9
        Foreign sales corporation                             (5.5)          (5.2)          (4.4)
        Other                                                  4.6            3.4            1.5
                                                              ----           ----           ----
                                                              35.3%          35.1%          35.0%
                                                              ====           ====           ====

        The tax effects of the primary temporary differences are as follows:

                                                                                  2001         2000        1999
                                                                                  ----         ----        ----
           Deferred tax assets:
               Net arbitration award against Company                            $    -        $   -       $  446
               Net products liability settlement                                     74         115          161
               Vacation reserve                                                      58          59           45
               Inventory reserve                                                    233         270          236
               Receivable reserve                                                   138         138          145
               Warranty reserve                                                      46          46           44
               Other, net                                                            66          61           59
                                                                                -------       -----       ------
                           Total current deferred tax asset                     $   615       $ 689       $1,136
                                                                                -------       -----       ------

           Deferred tax liabilities:
               Amortization of capitalized software                             $   429       $ 395       $  407
               Depreciation                                                         245         257          295
                                                                                -------       -----       ------
                  Total noncurrent deferred tax liability                       $   674       $ 652       $  702
                                                                                =======       =====       ======
</TABLE>

                                       24
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

11.    Business Segment Information:

       The Company primarily manufactures, under contract, various types of
       high-technology equipment which it has designed and developed. The
       Company considers its business activities to be divided into two
       segments: Aircrew Training Systems (ATS) and Industrial Simulation. The
       ATS business produces devices which create and monitor the physiological
       effects of motion, including spatial disorientation and centrifugal
       forces for medical, training, research and entertainment markets. The
       Industrial Group business produce chambers that create environments that
       are used for sterilization, research and medical applications. The
       following segment information reflects the accrual basis of accounting:
<TABLE>
<CAPTION>
                                                                                                Industrial
                                                                                   ATS             Group       Total
                                                                                ---------       ----------    --------
        <S>                                                                         <C>            <C>          <C>
       2001
       ----
       Net sales                                                                $ 23,567        $  8,885      $ 32,452
       Interest expense                                                              558              94           652
       Depreciation and amortization                                                 796             482         1,278
       Operating income                                                            5,794            (906)        4,888
       Income tax provision                                                        1,833            (350)        1,483
       Identifiable assets                                                        27,534           4,652        32,186
       Expenditures for segment assets                                             2,306             322         2,628

       2000
       ----
       Net sales                                                                $ 26,361         $ 8,559      $ 34,920
       Interest expense                                                              465             125           590
       Depreciation and amortization                                               1,024             371         1,395
       Operating income                                                            5,039           1,355         6,394
       Income tax provision                                                        1,601             431         2,032
       Identifiable assets                                                        20,344           5,538        25,882
       Expenditures for segment assets                                               650             167           817

       1999
       ----
       Net sales                                                                $ 24,465         $ 4,760      $ 29,225
       Interest expense                                                              711              84           795
       Depreciation and amortization                                               1,289             353         1,642
       Operating income (loss)                                                     5,697             (89)        5,608
       Income tax provision (benefit)                                              1,745             (61)        1,684
       Identifiable assets                                                        22,470           2,644        25,114
       Expenditures for segment assets                                               438              26           464

                                                                                   2001            2000          1999
                                                                                   ----            ----          ----

       Reconciliation to consolidated amounts:
         Segment operating income                                               $  4,888         $ 5,608      $  4,922
         Less interest expense                                                      (652)           (795)         (966)
         Less income taxes                                                        (1,483)         (1,684)       (1,385)
                                                                                --------         -------       -------
       Total profit for segments                                                   2,641           3,129         2,571

       Corporate home office expense                                                (766)           (849)         (714)
       Interest and other expenses                                                  (272)           (517)         (482)
       Income tax benefit                                                            357             483           419
       Minority interest                                                             (51)            (76)           --
                                                                                --------         -------       -------
       Net income                                                               $  2,021         $ 2,170       $ 1,794
                                                                                ========         =======       =======
</TABLE>

       Segment operating income (loss) consists of net sales less applicable
       costs and expenses relating to these revenues. Unallocated general
       corporate expenses, letter of credit fees, interest expense, and income
       taxes have been excluded from the determination of the total profit for
       segments. General corporate expenses are primarily central administrative
       office expenses. Property, plant, and equipment are not identified with
       specific business segments because most of these assets are used in each
       of the segments.


                                       25
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

11.    Business Segment Information (Continued):

       Approximately 43% of sales totaling $13,924 in 2001 were made to one
       international and one domestic customer in the ATS segment. Approximately
       63% of sales totaling $16,609 in 2000 were made to two international and
       one domestic customer in the ATS segment. Approximately 24% of sales
       totaling $7,005 in 1999 were made to one international customer in the
       ATS segment.

       Included in the segment information for the year ended February 23, 2001,
       are export sales of $16,404. Of this amount, there are sales to or
       relating to governments or commercial accounts in Great Britain of
       $5,660. Sales to the U.S. government and its agencies aggregate $916 for
       the year ended February 23, 2001.

       Included in the segment information for the year ended February 25, 2000
       are export sales of $23,907. Of these amounts, there are sales to or
       relating to governments or commercial accounts in Great Britain ($4,821),
       Poland ($4,201), and Nigeria ($8,107) for ATS sales. Sales to the U.S.
       government and its agencies aggregate $1,587 for the year ended February
       25, 2000.

       Included in the segment information for the year ended February 26, 1999
       are export sales of $22,876. Of these amounts, there are sales to or
       relating to governments or commercial accounts in Great Britain ($7,005),
       Poland ($2,530), Japan ($2,130), Nigeria ($1,990), Bangladesh ($1,548),
       Turkey ($1,057), the UAE ($1,040), and Egypt ($949) for ATS sales. Sales
       to the U.S. government and its agencies aggregated $1,158 for the year
       ended February 26, 1999.


12.    Stock Options:

       In August 1998 the Company adopted an Incentive Stock Option Plan to
       replace the 1988 Incentive Stock Option Plan which expired in August
       1998. The plan authorizes a committee of the Board of Directors to grant
       options for the purchase of up to 500,000 shares of common stock to
       qualifying officers and other key employees. The Plan provides that
       option price shall not be less than 100% (or in the case of a ten percent
       owner, 110%) of the current market price of the stock on the date of the
       grant. Options may be exercised on a cumulative basis at the rate of 25%
       per year commencing one year after the date of grant. The Plan will
       terminate on August 1, 2008. At February 23, 2001, there were 321,500
       shares available to be granted under the Plan.

       Since the exercise price of each option is not less than 100% of the
       current market price of the Company's stock on the date of grant, no
       compensation cost has been recognized for the Plan. Had compensation cost
       for the Plan been determined based on the fair value of the options at
       the grant dates consistent with the method of SFAS No. 123, the Company's
       net income and earnings per share would have been reduced to the pro
       forma amounts indicated below. Reported amounts reflect the 2 for 1 stock
       split declared by the Company on February 25, 1999 (see note 1).

                                                2001        2000         1999
                                              -------     --------     -------
       Net income:
         As reported                          $ 2,021     $ 2,837      $ 2,170
         Pro forma                            $ 1,549     $ 2,350      $ 2,073

       Basic earnings per share:
         As reported                          $   .29     $   .40      $   .32
         Pro forma                            $   .22     $   .33      $   .30

       Diluted earnings per share:
         As reported                          $   .27     $   .36      $   .29
         Pro forma                            $   .21     $   .30      $   .28

       The fair value of each option grant is estimated on the date of grant
       using the Black-Scholes options-pricing model with the following weighted
       average assumptions used for grants in 1999: dividend yield of 0%;
       expected volatility of; risk-free interest rate of 5.47%; and expected
       life of five years.


                                       26
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

12.    Stock Options (Continued):

       A summary of the status of the Plan as of February 23, 2001, February 25,
       2000, and February 26, 1999, and changes during the years ending on those
       dates is presented below.
<TABLE>
<CAPTION>
                                                             2001                         2000
                                                  --------------------------   -------------------------
                                                                   Weighted                     Weighted
                                                                   average                      average
                                                                   exercise                     exercise
                                                    Shares           price       Shares           price
                                                  ---------       --------     ---------        ---------
        <S>                                           <C>             <C>         <C>               <C>
       Outstanding at beginning of year            497,750        $   6.80      543,700         $    6.57
       Granted                                        -                -           -                  -
       Exercised                                   (33,400)           4.79      (28,950)             3.59
       Forfeited                                      -                -        (17,000)             4.86
       Outstanding at end of year                  464,350                      497,750
                                                                                -------

       Options exercisable at year end             147,936                       41,657
       Weighted average fair value of
         options granted during the year                          $    -                        $     -
</TABLE>
                                                             1999
                                                  ---------------------------
                                                                    Weighted
                                                                    average
                                                                    exercise
                                                   Shares            price
                                                  ---------         ---------

       Outstanding at beginning of year            92,350           $   1.99
       Granted                                    490,000               7.05
       Exercised                                  (38,650)              1.78
       Forfeited                                     -                   -
       Outstanding at end of year                 543,700

       Options exercisable at year end             16,781
       Weighted average fair value of
           options granted during the year                          $  3.70

        The following information applies to options outstanding at February 23,
        2001:
<TABLE>
<CAPTION>
                                           Options outstanding                           Options exercisable
                                   ----------------------------------- -------------------------------------------------------
                                                      Weighted
                                       Number         average           Weighted           Number             Weighted
                                   Outstanding at    remaining           average       exercisable at          average
                                     February 23,    contractual         exercise        February 23,         exercise
       Range of exercise prices          2001       life (years)          price             2001               price
       ------------------------    --------------   ------------        ----------     --------------         ---------
         <S>                            <C>            <C>                <C>                <C>                 <C>
       $1.75 to $2.63                  19,600         5.5 years          $ 2.25             17,248              $ 2.25
       $5.00 to $7.81                 104,000         7.8 years          $ 5.00             45,500              $ 5.00
       $7.81 to $9.76                 340,750         8 years            $ 7.81             85,188              $ 7.81
</TABLE>


                                       27
<PAGE>
Notes to Consolidated Financial Statements
($ in thousands, except share data)

13.     Claims and Litigation:

        Certain other claims, suits, and complaints arising in the ordinary
        course of business have been filed or are pending against the Company.
        In the opinion of management, after consultation with legal counsel, all
        such matters are reserved for or adequately covered by insurance or, if
        not so covered, are without merit or are of such kind, or involve such
        amounts, as would not have a significant effect on the financial
        position or results of operations of the Company if disposed of
        unfavorably.

14.     Employee Benefit Plan

        The Company maintains a retirement savings 401(k) plan for eligible
        employees. The Company's contributions to the plan are based on a
        percentage of the employees' qualifying contributions. The Company's
        contributions totaled $124, $121, and $103 in 2001, 2000, and 1999,
        respectively.

15.     Quarterly Consolidated Financial Information (Unaudited):

        Financial data for the interim periods of 2001, 2000 and 1999 were as
        follows:
<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                                          --------------------------------------
        Fiscal Year 2001                                    May     August   November   February
                                                             26       25        24          23
                                                          -------  -------   --------   --------
        <S>                                                 <C>      <C>       <C>         <C>
        Net sales                                         $ 7,157  $ 6,994   $ 8,622     $9,679
        Gross profit                                        3,355    2,678     2,809      4,233
        Operating income                                    1,522      482       617      1,501
        Income before income taxes                          1,351      246       335      1,266
        Minority interest                                       2       22         0         27
        Net income                                            882      118       227        794
        Earnings per common share:
          Basic                                               .13      .02       .03        .11
          Diluted                                             .12      .02       .03        .10
</TABLE>
<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                                          --------------------------------------
        Fiscal Year 2000                                    May     August   November   February
                                                            28        27        26         25
                                                          -------  -------   --------   --------
         <S>                                                <C>      <C>       <C>        <C>
        Net sales                                         $ 8,295  $ 8,279   $ 9,107    $ 9,239
        Gross profit                                        3,418    2,679     3,381      3,320
        Operating income                                    1,426      716     1,401      1,784
        Income before income taxes                          1,231      522     1,187      1,540
        Minority interest                                     (35)     (32)        8        129
        Net income                                            835      372       763        867
        Earnings per common share:
          Basic                                               .11      .05       .11        .13
          Diluted                                             .10      .05       .10        .11
</TABLE>
<TABLE>
<CAPTION>
                                                                        Quarter Ended
                                                          --------------------------------------
        Fiscal Year 1999                                     May    August   November   February
                                                              29      28        27         26
                                                          -------  -------   --------   --------
         <S>                                                  <C>     <C>       <C>       <C>
        Net sales                                         $ 7,460  $ 5,996   $ 7,475    $ 8,294
        Gross profit                                        2,749    2,283     2,648      3,992
        Operating income                                      999      829     1,003      1,928
        Income before income taxes                            712      441       597      1,697
        Minority Interest                                       -       61       (10)        25
        Net income                                            464      234       399      1,073
        Earnings per common share:
          Basic                                               .07      .03       .05        .17
          Diluted                                             .07      .02       .05        .15
</TABLE>
        Note: All earnings per share amounts have been restated to reflect a 2
        for 1 stock split effective May 28, 1999.

                                       28